Should Investors Buy Sierra Wireless Inc. Now or Stay on the Sidelines?

Does a strong outlook justify Sierra Wireless Inc.’s (TSX:SW)(NASDAQ:SWIR) expensive valuation?

| More on:
The Motley Fool

Sierra Wireless Inc. (TSX:SW)(NASDAQ:SWIR) is down over 15% year to date. This will definitely pique the interest of investors as they look for an attractive entry point into the stock. Let’s look at this in order to determine if this is a good time to step in or if investors should stay on the sidelines.

Most recent quarter

The most recent quarter was strong, beating expectations with a 21% organic growth rate in revenue and a gross margin of 33.6% compared with 32.5% in the fourth quarter of 2013. Free cash flow generated in the quarter (excluding the effect of working capital) was $4.4 million, and cash on the balance sheet increased to $207 million.

During the quarter, the company made a $90 million cash acquisition of Sweden-based Wireless Maingate, a company with 2014 revenue of over US$19 million and EBITDA of US$6 million. Wireless Maingate provides M2M connectivity and data management services, and this acquisition represents significant progress in solidifying Sierra Wireless’ device-to-cloud business. The acquisition metrics were reasonable, at 4.7 times sales and 15 times EBITDA. For comparison purposes, Sierra is trading at an EBITDA multiple of almost 30 times.

Industry fundamentals

As we know, machine to machine communication is an industry that is growing fast. It is a fragmented market that Sierra Wireless is well positioned to consolidate, as we are at the beginning of a secular trend that is here to stay.

Long term, it is reasonable to expect that most machines will be connected, providing financial, service, and lifestyle benefits to users of these machines. Infonetics Research predicts that revenue from M2M services will more than double from just under $15 billion in 2012 to $31 billion in 2017. As Sierra is now focused solely on the M2M business and currently boasts a leading market share, it stands to benefit greatly from this growth.

Expectations

There are 13 analysts covering the stock, and the consensus EPS estimate for the next quarter is $0.18 per share, which is up a lot from the $0.02 per share in the same period last year. The variation of earnings estimates is reasonable, with the low being $0.16 and the high at $0.19. Revenue guidance for 2015 is for $145 million to $149 million for a growth rate between 20-23%.

Valuation

In my view, the major caveat regarding Sierra Wireless is the fact that valuations are high. On a GAAP basis, the company has no earnings, and on an adjusted, non-GAAP basis, it is trading at a P/E of 80 times 2014 EPS and almost 60 times expected 2015 adjusted EPS. In my view, Sierra is currently priced for perfection and this can turn bad pretty quickly. While I like Sierra’s fundamentals, performance, and outlook, it seems to me that investors would be wise to sit back and wait for a better entry point.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any stocks mentioned. David Gardner owns shares of Sierra Wireless.

More on Tech Stocks

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Business man on stock market financial trade indicator background.
Tech Stocks

1 Growth Stock Down 50 Percent to Buy Right Now

There are plenty of growth stocks in the market worth considering, but Shopify (TSX:SHOP) looks like one of the best…

Read more »

Woman has an idea
Tech Stocks

Prediction: 1 Stock That Could Trounce the Market 

The TSX has been favouring tech stocks, but not this one. However, it has the potential to trounce the market…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Businessman holding AI cloud
Tech Stocks

AI Will Transform Everything: Investors, Be Early Adopters and Buy These 3 Stocks

Investors looking to invest in companies doing big things in AI should consider these three stocks for their portfolios.

Read more »

stock research, analyze data
Tech Stocks

Forget Shopify: These Unstoppable Stocks Are Better Buys Today 

Should you consider buying Shopify stock while rivals consider a buyout or should you go for stocks with a stronger…

Read more »

A colourful firework display
Tech Stocks

2 Potentially Explosive Stocks to Buy in March

These two growth stocks are destined for many more years of market-crushing returns.

Read more »

edit CRA taxes
Tech Stocks

TFSA Millionaires Are Learning They Can Still Be Taxed

If you day trade stocks like Shopify (TSX:SHOP) in a TFSA, you may be taxed.

Read more »